<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO
_________________.
Commission File Number 0-26814
DATAWORKS CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0209937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5910 PACIFIC CENTER BOULEVARD 92121
SUITE 300 (Zip Code)
SAN DIEGO, CALIFORNIA
(Address of principal executive offices)
(619) 546-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
As of July 31, 1998, there were 14,391,169 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE> 2
DATAWORKS CORPORATION
FORM 10-Q INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Income (unaudited)
for the Three Months and Six Months Ended
June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 12
Item 4. Submission of Matters to Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATAWORKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,261 $ 17,418
Short-term investments, available-for-sale 11,613 30,503
Accounts receivable, net of allowance for doubtful accounts of
$2,602 and $2,360 at June 30, 1998 and December 31, 1997,
respectively 53,164 53,617
Deferred income taxes 3,361 3,377
Other current assets 8,823 6,354
-------- --------
Total current assets 106,222 111,269
Equipment, furniture and fixtures, net 10,494 8,184
Capitalized software costs, net 8,072 4,807
Intangible assets, net 10,460 6,083
Advances to related parties 667 97
Other assets 781 696
-------- --------
Total assets $136,696 $131,136
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,792 $ 11,802
Accrued compensation 7,247 10,476
Income taxes payable 3,037 1,732
Deferred revenue 15,368 14,271
Current portion of long-term obligations 575 721
Other accrued liabilities 2,394 5,611
-------- --------
Total current liabilities 40,413 44,613
Deferred income taxes 1,030 964
Long-term obligations, less current portion 1,088 1,493
Commitments
Shareholders' equity:
Common shares, no stated par value:
Authorized shares - 25,000
Issued and outstanding shares - 14,383 and 13,967 at
June 30, 1998 and December 31, 1997, respectively 87,653 81,458
Retained earnings 6,367 2,445
Cumulative foreign currency translation adjustments 145 163
-------- --------
Total shareholders' equity 94,165 84,066
-------- --------
Total liabilities and shareholders' equity $136,696 $131,136
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 4
DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Software licenses $19,612 $14,410 $38,021 $28,107
Maintenance and other services 19,755 15,309 38,506 29,041
Hardware 1,660 2,788 5,083 5,296
------- ------- ------- -------
Total revenues 41,027 32,507 81,610 62,444
Cost of revenues:
Software licenses 2,456 1,839 4,294 3,331
Maintenance and other services 15,785 10,589 29,004 20,340
Hardware 1,229 2,161 3,928 4,007
------- ------- ------- -------
Total cost of revenues 19,470 14,589 37,226 27,678
------- ------- ------- -------
Gross profit 21,557 17,918 44,384 34,766
Operating expenses:
Sales and marketing 11,444 9,478 22,253 17,545
General and administrative 5,374 3,992 9,739 7,774
Research and development 3,743 2,648 6,859 5,074
------- ------- ------- -------
Total operating expenses 20,561 16,118 38,851 30,393
------- ------- ------- -------
Income from operations 996 1,800 5,533 4,373
Other income, net 311 434 644 816
------- ------- ------- -------
Income before income taxes 1,307 2,234 6,177 5,189
Provision for income taxes 477 793 2,255 1,859
------- ------- ------- -------
Net income $ 830 $ 1,441 $ 3,922 $ 3,330
======= ======= ======= =======
Net income per share - basic $ 0.06 $ 0.10 $ 0.28 $ 0.24
======= ======= ======= =======
Net income per share - diluted $ 0.06 $ 0.10 $ 0.26 $ 0.23
======= ======= ======= =======
Common shares outstanding - basic 14,306 13,787 14,209 13,713
======= ======= ======= =======
Common shares outstanding - diluted 15,013 14,437 15,015 14,368
======= ======= ======= =======
</TABLE>
See accompanying notes
4
<PAGE> 5
DATAWORKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,922 $ 3,330
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of intangible assets 3,195 2,289
Compensation regarding granting of stock options 35 46
Deferred income taxes 82 (212)
Provision for doubtful accounts 447 454
Changes in operating assets and liabilities:
Accounts receivable 6 1,759
Other current assets (2,469) 1,008
Accounts payable (10) (1,229)
Accrued compensation (3,229) (539)
Deferred revenue 1,097 3,861
Other accrued liabilities and income taxes payable (1,912) (1,832)
-------- --------
Net cash provided by operating activities 1,164 8,935
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures (3,991) (1,866)
Purchases of short-term investments (18,527) --
Sale of short-term investments 37,417 --
Additions to capitalized software costs (3,450) (1,893)
Increase in intangible assets (1,350) (150)
Advances to related parties, net (570) 58
Other assets (85) (103)
-------- --------
Net cash provided by (used in) investing activities 9,444 (3,954)
FINANCING ACTIVITIES
Net increase (decrease) in obligations under line of credit (468) 1,800
Proceeds from notes payable -- 500
Repayments of notes payable and capital lease obligations (774) (680)
Issuance of common stock, net 2,495 1,067
-------- --------
Net cash provided by financing activities 1,253 2,687
Effect of exchange rate on cash (18) (32)
-------- --------
Net increase in cash and cash equivalents 11,843 7,636
Cash and cash equivalents at beginning of period 17,418 50,825
-------- --------
Cash and cash equivalents at end of period $ 29,261 $ 58,461
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 80 $ 200
======== ========
Cash paid during the period for income taxes $ 1,020 $ 1,433
======== ========
NON-CASH TRANSACTIONS
Common stock issued for business acquisitions $ 3,665 $ --
======== ========
Equipment acquired through capital leases $ 560 $ 321
======== ========
Earnouts payable for business acquisitions $ 131 $ 139
======== ========
</TABLE>
See accompanying notes
5
<PAGE> 6
DATAWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements included herein
have been prepared by DataWorks Corporation (the "Company" or "DataWorks")
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1997 included in the Company's Annual Report on Form 10-K. The results of
operations for the three and six months ended June 30, 1998 are not necessarily
indicative of the results which may be reported for any other interim period or
for the year ending December 31, 1998.
2. EARNINGS PER SHARE
Basic earnings per share was computed by dividing net income by the weighted
average shares of common stock outstanding during the periods. Diluted earnings
per share was computed by dividing net income by the weighted average shares of
common stock and common stock equivalents outstanding during the periods. The
dilutive effect of the potential exercise of outstanding options and warrants to
purchase shares of common stock was calculated using the treasury stock method.
3. RECEIVABLES FROM RELATED PARTIES
At June 30, 1998 and December 31, 1997, the receivables from related parties
consist of balances due from one of DataWorks' principal officers and
shareholders representing net advances totaling $97,000 and advances totaling
$570,000 at June 30, 1998, to a minority owned unconsolidated foreign
subsidiary.
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). This statement
requires the Company to report in the financial statements, in addition to net
income, comprehensive income and its components including foreign currency
translation adjustments and unrealized gains and losses on its
available-for-sale securities. SFAS 130 also requires the Company to reclassify
financial statements for earlier periods provided for comparative purposes. For
the three and six months ended June 30, 1998 and 1997 comprehensive income was
not significantly different than net income.
5. SOFTWARE REVENUE RECOGNITION
As of January 1, 1998, the Company adopted Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), which provides guidance for
recognizing revenue related to sales by software vendors. The adoption of SOP
97-2 did not have a significant impact on the Company's financial statements for
the three and six months ended June 30, 1998.
6. ACQUISITIONS
On April 22, 1998, the Company acquired the assets of C-WAY Systems, Inc., a
Delaware Corporation, ("C-WAY") in exchange for 106,315 shares of DataWorks'
common stock valued at approximately $2.6 million and a possible earnout of up
to an additional approximately $2.6 million. The earnout is payable over four
years based upon satisfaction of certain product development goals and a
percentage of future revenues generated. Prior to the transaction, C-WAY
developed, sold and supported advanced planning and scheduling software for
manufacturers. The transaction was accounted for as a purchase, and the results
of operations of C-WAY are included with the results of the Company's operations
subsequent to the date of acquisition. The excess costs over fair market value
6
<PAGE> 7
of the net assets purchased has been allocated to developed technology, customer
base and assembled workforce and is being amortized over five years.
Effective June 1, 1998, the Company acquired the assets of CTi Software BV
("CTi") in exchange for $1.25 million cash and 65,689 shares of DataWorks'
common stock, at the time valued at approximately $1.25 million. Prior to the
acquisition, CTi, located in Hague, Netherlands, developed, marketed, and
maintained mid-range manufacturing software. The transaction was accounted for
as a purchase, and the results of operations of CTi are included with the
results of the Company's operations subsequent to the date of acquisition. The
excess costs over fair market value of the net assets purchased has been
allocated to customer base and assembled workforce and is being amortized over
five years.
7. SUBSEQUENT EVENT
On July 3, 1998 the Company acquired the assets of 7+7 Software AB ("7+7") in
exchange for cash payments over three years in the aggregate amount of $0.35
million. 7+7 was an enterprise software consulting group to mid-range
manufacturers. The transaction will be accounted for as a purchase, and the
results of operations of 7+7 will be included with the results of the Company's
operations subsequent to the date of acquisition.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
DataWorks' future results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, fluctuations in the Company's operating results, continued new
product introductions by the Company, market acceptance of the Company's new
product introductions, new product introductions by competitors and the other
factors referred to herein and in the Company's Form 10-K for the year ended
December 31, 1997.
The Company develops, markets, implements and supports open systems,
client/server based Enterprise Resource Planning ("ERP") software for mid-sized
discrete manufacturing companies with annual revenues between $3 million and $1
billion. The Company's products and services facilitate enterprise-wide
management of resources and information and are designed to allow mid-range
manufacturers to reduce order fulfillment cycle times, improve operating
efficiencies and measure critical company performance against defined plan
objectives. DataWorks' principal products include Avante, Impresa for MRO, Vista
and Vantage.
The Company derives a significant portion of its revenues from its international
business, which is subject to various risks common to international activities,
including currency fluctuations. Revenues and expenses of the Company's
international operations are translated at the average exchange rate in effect
during the period. Translation adjustments are reported as a separate component
of shareholders' equity.
Fluctuations in quarterly and annual results may occur as a result of factors
affecting demand for the Company's products, such as the timing of the Company's
and competitors' new product introductions and product enhancements. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain consolidated statement of operations data:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software licenses 48% 44% 47% 45%
Maintenance and other services 48 47 47 47
Hardware 4 9 6 8
--- --- --- ---
Total revenues 100 100 100 100
Cost of revenues:
Software licenses 6 6 5 5
Maintenance and other services 38 33 36 33
Hardware 3 6 5 6
--- --- --- ---
Total cost of revenues 47 45 46 44
--- --- --- ---
Gross profit 53 55 54 56
Operating expenses:
Sales and marketing 28 29 27 28
General and administrative 13 12 12 12
Research and development 9 8 8 8
--- --- --- ---
Total operating expenses 50 49 47 48
--- --- --- ---
Income from operations 3% 6% 7% 8%
=== === === ===
</TABLE>
8
<PAGE> 9
COMPARISON OF THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues - Total revenues increased $8.5 million or 26% to $41.0 million for the
quarter ended June 30, 1998 from $32.5 million for the same period in the prior
year, and increased $19.2 million or 31% to $81.6 million for the first six
months of 1998 from $62.4 million for the same period in 1997. The second
quarter revenue growth rate, although slower than the first quarter, reflected
the continued growth of software licenses and maintenance and other service
revenues. Software sales increased 36% for the second quarter of 1998 compared
to the same period in 1997 and increased 35% for the first six months of 1998
compared to the same period in 1997. The growth in software license revenue was
attributable to sales of the Company's lower tier products, Vista and Vantage,
and to a lesser extent, Avante international sales, partially offset by lower
domestic Avante sales. The Company believes that increased competition, which
impacted second quarter domestic Avante sales, will continue to exert pressure
on revenues for the remainder of 1998. Maintenance and service revenues
increased 29% and 33% for the three and six months ended June 30, 1998,
respectively, from the corresponding periods in 1997. The growth in maintenance
and other services revenues was a result of the increase in software license
agreements, which provide for initial maintenance, training, installation and
support services. Hardware sales declined from 9% to 4% and 8% to 6% for the
three and six months ended June 30, 1998, respectively, from the corresponding
periods in 1997. The revenue mix between software licenses, maintenance and
other services, and hardware shifted primarily due to the decreased hardware
sales.
As a percentage of the Company's total revenues, international revenues
represented 23% in the second quarter of 1998 as compared with 15% in the 1997
second quarter. For the six months ended June 30, 1998, international revenues
represented 21% as compared to 15% during the corresponding period in 1997. The
increase in international revenues consisted primarily of sales from the
Company's UK subsidiary and its French subsidiary, which was purchased July
1997. Although DataWorks has experienced solid international growth in recent
quarters, European operations generally experience lower revenues in the summer
months and the Company anticipates this may affect third quarter results.
Cost of Revenues - Total cost of revenues increased $4.9 million or 34% to $19.5
million for the quarter ended June 30, 1998 from $14.6 million in the same prior
year period, and increased $9.5 million or 34% to $37.2 million for the first
six months of 1998 from $27.7 million for the same period in 1997. Cost of
software licenses as a percentage of software revenue remained a constant 13%
for the second quarter of 1998 and 1997. For the six months ended June 30, 1998,
and 1997, software license cost as a percentage of software revenue were 11% and
12%, respectively. The fluctuations were attributable to the change in software
product mix as previously discussed. Cost of maintenance and other services as a
percentage of related revenues increased to 80% from 69% for the second quarter
of 1998 as compared to 1997. For the six months ended June 30, 1998 and 1997,
the cost of maintenance and other services as a percentage of related revenues
was 75% and 70%, respectively. These expenses were impacted by the 1998 shift
toward relatively higher service revenue, which bear a higher cost than
maintenance revenue. The Company has made a significant investment in its
professional consulting service organization, which has experienced increased
growth during 1998. In addition to the downtime associated with orienting new
staff, numerous existing staff were cross-trained on the Company's various
software offerings in response to customer demand. As a result, the Company
experienced a temporary reduction in the overall utilization rate of its
professional service staff during the second quarter of 1998.
Gross Profit - Gross profit increased $3.7 million or 21% to $21.6 million from
$17.9 million for the second quarter of 1998 compared to the same period last
year representing 53% and 55% of total revenues in those quarters, respectively.
Gross profit increased $9.6 million or 28% to $44.4 million from $34.8 million
for the six months ended June 30, 1998 compared to the same period last year
representing 54% and 56% of total revenues, respectively. The increase in
absolute dollars was directly related to the increase in total revenues. Gross
profit, as percentage of revenues, for both the three and six month periods in
fiscal year 1998 were unfavorably impacted by the change in product mix and
reduction of professional services utilization.
Sales and Marketing Expenses - Sales and marketing expenses increased $1.9
million or 20% to $11.4 million in the three months ended June 30, 1998 from
$9.5 million for the same period in 1997, representing 28% and 29% of total
revenues, respectively. These expenses increased $4.8 million or 27% to $22.3
million in the six months ended June 30, 1998 from $17.5 million for the same
period in 1997, representing 27% and 28% of total revenues, respectively. The
absolute dollar increase was primarily attributable to increased commission
expense associated with the higher revenues.
9
<PAGE> 10
General and Administrative Expenses - General and administrative expenses
increased $1.4 million or 35% to $5.4 million for the three months ended June
30, 1998 from $4.0 million for the same period in 1997, representing 13% and 12%
of the total revenues, respectively. These expenses increased $1.9 million or
24% from $7.8 million in the six months ended June 30, 1997 to $9.7 million for
the same period in 1998, representing 12% of total revenues in each period. The
increase, in absolute terms, resulted primarily from increases in staffing and
information systems infrastructure to support the Company's growth as well as
increases in expenses associated with the expanding operations of its foreign
subsidiaries.
Research and Development Expenses - DataWorks continues to invest heavily in the
future by funding research and development projects. Research and development
expenses are comprised primarily of salaries and a portion of the Company's
overhead for its in-house staff and amounts paid to outside consultants hired by
the Company, as appropriate, to supplement the product development efforts of
its in-house staff. Research and development expenses are charged to operations
as incurred. However, certain software production costs related to the Company's
Impresa for Backoffice product, are capitalized pursuant to Statement of
Financial Accounting Standards No. 86, Accounting for Software Costs.
Amortization of these costs will begin when the product is initially released,
which is expected in late 1998. As of June 30, 1998, the amount capitalized for
Impresa for Backoffice was $6.6 million. In addition to in-house software
development costs, the Company purchased certain capitalized software, which has
already reached technological feasibility, from third-party software providers
totaling $1.2 million for the six months ended June 30, 1998.
Gross research and development expenses increased $1.5 million or 42% to $5.0
million in the quarter ended June 30, 1998 from $3.5 million for the same period
in 1997, representing 12% and 11% of total revenues in each quarter,
respectively. These expenses increased $2.4 million or 36% to $9.2 million in
the six months ended June 30, 1998 from $6.7 million for the same period in 1997
representing 11% of total revenues, in each period. Gross research and
development expenditures included capitalized software costs related to Impresa
for Backoffice of $1.3 million and $0.9 million for the second quarters of 1998
and 1997, respectively; and $2.3 million and $1.6 million for the six months
ended June 30, 1998 and 1997, respectively.
Other Income, Net - Other income consists primarily of interest and dividend
income offset slightly by interest expense. Other income for both the three and
six months ended June 30, 1998 was impacted by the decreased balance of cash,
cash equivalents and short term investments as compared to the same 1997
periods.
Provision for Income Taxes - During 1998, the Company's effective income tax
rate has remained a constant 37%. For the three and six months ended June 30,
1997, the effective income tax rate was 36%. The estimated annual effective tax
rate is relatively sensitive to the results of operations in various foreign
subsidiaries. Consequently, such projections may change in future periods and
the actual effective tax rate could differ from the current estimate.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily through cash generated from
operations and its current cash and short-term investment balances. During the
first six months of 1998, the Company generated $1.2 million of cash from its
operating activities. This included $3.9 million net income and $3.8 million of
non-cash expenses that resulted in a cash increase of $7.7 million offset by
$6.5 million of cash used for working capital purposes. The use of working
capital was attributable to the payment of year-end commissions and bonuses,
accrued merger-related integration costs, and prepaid third-party database and
maintenance costs.
Cash provided by investing activities amounted to $9.4 million for the first six
months of 1998. The increase was primarily due to the maturity of short-term
investments that totaled $19.0 million, net. Cash used in investing activities
included $3.5 million of capitalized software costs primarily related to the
Impresa for Backoffice development, $4.0 million of capital equipment purchases,
and the $1.4 million increase of intangible assets associated with the purchase
of CTi and C-WAY.
Financing activities provided $1.3 million during the six months ended June 30,
1998. Proceeds from the exercise of stock options and from stock purchased by
employees through the Company's Employee Stock Purchase Plan provided cash of
$2.5 million. Capital lease obligations, repayment of the Company's line of
credit obligation and the payment of non-interest bearing earnout payables
during the first two quarters of 1998 reduced cash provided by financing
activities by $1.2 million.
10
<PAGE> 11
As of June 30, 1998 DataWorks had $65.8 million working capital including $29.3
million in cash and cash equivalents and $11.6 million in short-term investments
consisting of high-quality municipal bonds, U. S. government debt securities and
commercial paper and auction securities. DataWorks' principal commitments as of
June 30, 1998 consisted primarily of facilities and equipment leases. In
addition, the Company is obligated under certain software reseller agreements
with third-party providers to render quarterly or annual minimum royalty and
maintenance support payments.
DataWorks' capital resources may be used to support working capital
requirements, product development, capital equipment requirements and possible
acquisitions of businesses, products or technologies complementary to the
Company's current business. The Company believes that its current cash and
short-term investment balances, available lines of credit and cash flows from
operations are sufficient to fund its operations for at least the next 12
months. However, during this period or thereafter, the Company may require
additional financing. There can be no assurance that such additional financing
will be available on terms favorable to the Company, or at all.
CERTAIN RISKS
Software Revenue Recognition - Prior to 1998, the Company recognized revenue in
accordance with the provisions of the American Institute of Certified Public
Accountants ("AICPA") Statement of Position No. 91-1, Software Revenue
Recognition ("SOP 91-1"). The AICPA has recently adopted Statement of Position
No. 97-2, Software Revenue Recognition ("SOP 97-2"), that supersedes SOP 91-1.
The Company adopted SOP 97-2 effective January 1, 1998. The adoption of SOP 97-2
did not have a significant impact on the Company's financial statements for the
three and six months ended June 30, 1998. However, there can be no assurance
that subsequent interpretations of this pronouncement by the Company's
independent auditors or the Securities and Exchange Commission will not modify
the Company's revenue recognition policies, or that such modifications will not
have a material adverse effect on the operating results reported in any
particular quarter. There can be no assurance that the Company will not be
required to adopt changes in its software licensing or services practices to
conform to SOP 97-2.
Year 2000 Compliance - Significant uncertainty exists in the software industry
concerning the potential effects from the Year 2000 issue associated with the
date codes used in computer software and hardware systems. The Company believes
that all of its existing products are Year 2000 compliant and new products are
being designed to be Year 2000 compliant. Although products have undergone the
Company's normal quality testing procedures, there can be no assurance that the
Company's software products contain all necessary date code changes. Any failure
of the Company's products to perform, including system malfunctions due to the
onset of the calendar year 2000, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also currently in the process of evaluating its information
technology infrastructure for Year 2000 compliance, including reviewing what
actions are required to make all software systems used internally Year 2000
compliant as well as actions needed to mitigate vulnerability to problems with
suppliers and other third-parties' systems. The Company is assessing the extent
of the necessary modifications to its computer software, and management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer system improvements to be Year 2000
compliant. There can be no assurance that such measures will alleviate the Year
2000 problems which could have a material adverse effect upon the Company's
business, operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 22, 1998, the Company acquired the assets of C-WAY
Systems, Inc., a Delaware corporation, ("C-WAY") in exchange for
106,315 shares of DataWorks' Common Stock valued at
approximately $2.6 million, which were issued to the former
stockholders of C-WAY, and a possible earnout of up to an
additional approximately $2.6 million. The issuance of such
Common Stock was exempted from registration with the Securities
and Exchange Commission in accordance with Section 3(b) of the
Securities Act of 1933, as amended. The earnout is payable over
four years based upon satisfaction of certain product
development goals and a percentage of future revenues generated.
Prior to the transaction, C-WAY developed, sold and supported
advanced planning and scheduling software for manufacturers. The
transaction was accounted for as a purchase, and the results of
operations of C-WAY are included with the results of the
Company's operations subsequent to the date of acquisition.
Effective June 1, 1998, the Company acquired the assets of CTi
Software BV ("CTi") in exchange for $1.25 million cash and
65,689 shares of DataWorks' common stock, at the time valued at
approximately $1.25 million. The issuance of such Common Stock
was exempted from registration with the Securities and Exchange
Commission in accordance with Section 4(2) of the Securities Act
of 1933, as amended. Prior to the acquisition, CTi, located in
Hague, Netherlands, developed, marketed, and maintained
mid-range manufacturing software. The transaction was accounted
for as a purchase, and the results of operations of CTi are
included with the results of the Company's operations subsequent
to the date of acquisition.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C> <C>
PROPOSAL 1: To elect the following directors to serve for the
ensuing year and until their successors are elected:
Stu Clifton 12,604,326 189,710
Norman Farquhar 12,602,440 191,596
Nathan W. Bell 12,603,886 190,150
Tony N. Domit 12,604,536 189,500
William P. Foley II 12,604,536 189,500
Ronald S. Parker 12,604,536 189,500
Roy Thiele-Sardina 12,603,711 190,325
PROPOSAL 2: To approve a change in the Company's state of 7,355,237 3,425,846 20,691 1,992,262
incorporation from California to Delaware
PROPOSAL 3: To approve an amendment to the Company's 12,436,041 309,862 21,133 -
Articles of Incorporation to increase the
number of authorized Common Stock to
50,000,000 shares
PROPOSAL 4: To approve the Company's Equity Incentive 6,948,435 3,739,167 74,258 2,032,176
Plan, as amended, to increase the aggregate
number of shares authorized for issuance under
such plan by 1,250,000 shares
PROPOSAL 5: To approve the Company's Employee Stock 10,448,884 273,078 23,198 2,048,876
Purchase Plan, as amended, to increase the
aggregate number of shares authorized for
issuance under such plan by 750,000 shares
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C> <C>
PROPOSAL 6: To approve the Company's 1995 Non-Employee 9,998,982 729,623 7,169 1,992,262
Director's Stock Option Plan, as amended
PROPOSAL 7: To ratify the selection of Ernst & Young LLP 12,765,440 8,530 20,066 -
as the Company's independent auditors for its
fiscal year ending December 31, 1998
</TABLE>
ITEM 5. OTHER INFORMATION
Pursuant to recent proxy rule changes, unless a shareholder who
wishes to bring a matter before the shareholders at the
Company's 1999 Annual Meeting of Shareholders notifies the
Company of such matter prior to March 27, 1999, management will
have discretionary authority to vote all shares for which it has
proxies in opposition to such matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 - Separation Agreement dated April 23, 1998,
between the Company and Robert C. Vernon.
Exhibit 11 - Statements of Consolidated Computation of Earnings
Per Share
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K.
None.
13
<PAGE> 14
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DATAWORKS CORPORATION
(Registrant)
Date: August 13, 1998 /s/ Stuart W. Clifton
--------------------------------------
Stuart W. Clifton
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1998 /s/ Norman R. Farquhar
--------------------------------------
Norman R. Farquhar
Chief Financial Officer and
Director
(Principal Financial Officer)
14
<PAGE> 1
EXHIBIT 10.1
April 23, 1998
Mr. Robert C. Vernon
35 Grand Miramar
Henderson, NV 89120
Dear Bob:
This letter sets forth the agreement between DataWorks Corporation (together
with each of its subsidiaries, the "Company") and you (the "Agreement") relating
to your mutually agreed to separation as an officer, employee and member of the
Board of Directors of the Company. You and the Company agree that this Agreement
shall supercede and replace the letter agreement entitled "Employment Terms"
dated November 29, 1997 (the "Employment Agreement") between you and the
Company. The terms of the new Agreement between you and the Company are as
follows:
1. SEPARATION. You will resign as an officer, employee and member of the
Board of Directors of the Company effective as of April 24, 1998 (the
"Separation Date").
2. ACCRUED SALARY AND PAID TIME OFF. On the Separation Date, the Company
will pay you all accrued salary, and all accrued and unused vacation
earned through the Separation Date, subject to standard payroll
deductions and withholdings. You are entitled to these payments upon the
Separation Date regardless of whether or not you sign this Agreement.
3. CONSULTING PERIOD. In exchange for the promises and covenants herein,
the parties agree that you shall serve as an outside consultant to the
Company for the period from the Separation Date through March 31, 2001
(the "Consulting Period"). During the Consulting Period, you agree that
from time to time, you will render consulting services upon reasonable
request, at mutually agreed upon times and upon reasonable notice.
You shall receive a fee for services, during the course of the
Consulting Period, subject to certain obligations referenced herein (the
"Consulting Payment"), and to be paid as follows: (i) $37,500 per
quarter paid in seven (7) equal consecutive installments commencing on
July 15, 1998 and continuing until January 15, 2000, each installment to
be paid on the 15th day of the first month of the quarter in which
services are being rendered; and (ii) $31,250 per quarter paid in four
(4) equal consecutive installments commencing on April 15, 2000 and
continuing until January 15, 2001, each installment to be paid on the
15th day of the first month of the quarter in which services are being
rendered. You agree that you shall be solely responsible for the payment
of any taxes imposed on account of any payments made to you and you
shall indemnify and hold the Company harmless for any and all
liabilities, loss, damages and/or judgements incurred by the Company
arising from or related to your failure to make appropriate tax
payments.
<PAGE> 2
4. OPTIONS. Each outstanding option to purchase Common Stock of the Company
which is held by you as of the Separation Date will continue to be
governed by the terms of the option agreement pursuant to which such
option was granted (each referred to as an "Option Agreement").
5. HEALTH INSURANCE. To the extent provided by the federal COBRA law or, if
applicable, state insurance laws, and by the Company's current group
health insurance policies, you will be eligible to continue your group
health insurance benefits. Later, you may be able to convert to an
individual policy through the provider of the Company's health
insurance, if you wish. If you elect continued coverage under COBRA, the
Company, as part of this Agreement, will pay your COBRA premiums (the
"COBRA Benefit") through the earlier of (i) eighteen (18) months
following the Separation Date ("the COBRA Period"), or (ii) the date in
which you begin full-time employment with another company or business
entity wherein comparable health benefits are offered. In addition, for
eighteen (18) months following the COBRA Period, the Company will
provide you with a monthly payment in an amount equal to the last
monthly premium paid by the Company under your COBRA Benefit. The
Company will adjust the COBRA Benefit amount from time to time as
appropriate, to make it equal in amount to the per month premium charged
by the Company's then-current group health insurance provider for the
level of coverage you were receiving on the last day of the COBRA
Period.
6. OTHER COMPENSATION OR BENEFITS. You acknowledge that, except as
expressly provided in this Agreement, you will not receive any
compensation, severance, benefits, shares of stock or stock options,
notwithstanding any prior agreement to the contrary, after the
Separation Date.
7. EXPENSE REIMBURSEMENTS. You agree that, within ten (10) business days of
the Separation Date, you will submit your final documented expense
reimbursement statement reflecting all business expenses you incurred
through the Separation Date, if any, for which you seek reimbursement.
The Company will reimburse you for these expenses pursuant to its
regular business practice. You agree and understand that you will not be
entitled to any expense reimbursements during the Consulting Period
unless such expenses are approved in advance and in writing by an
officer of the Company.
8. RETURN OF COMPANY PROPERTY. You agree that, within ten (10) business
days of the Separation Date, you will return to the Company all Company
documents (and all copies thereof) and other Company property which you
have had in your possession at any time, including, but not limited to,
Company files, notes, drawings, records, business plans and forecasts,
financial information, specifications, computer-recorded information,
tangible property (including, but not limited to, computers), credit
cards, entry cards, identification badges and keys; and, any materials
of any kind which contain or embody any proprietary or confidential
information of the Company (and all reproductions thereof).
9. PROPRIETARY INFORMATION OBLIGATIONS. Both during and after your
employment you will refrain from any use or disclosure of the Company's
proprietary or confidential information or materials without prior
written authorization from a duly authorized
2
<PAGE> 3
representative of the Company. The Proprietary Information and
Inventions Agreement which you have executed, a copy of which is
attached hereto as Exhibit B (the "Proprietary Information and
Inventions Agreement") will continue to apply pursuant to its terms
following the Separation Date.
10. CONFIDENTIALITY. The provisions of this Agreement shall be held in
strictest confidence by you and the Company and shall not be publicized
or disclosed in any manner whatsoever; provided, however, that: (a) you
may disclose this Agreement to your immediate family; (b) the parties
may disclose this Agreement in confidence to their respective attorneys,
accountants, auditors, tax preparers, and financial advisors; (c) the
Company may disclose this Agreement as necessary to fulfill standard or
legally required corporate reporting or disclosure requirements; and (d)
the parties may disclose this Agreement insofar as such disclosure may
be necessary to enforce its terms or as otherwise required by law.
11. NONDISPARAGEMENT. Both you and the Company agree not to disparage the
other party, and/or the other party's officers, directors, employees,
shareholders and agents, in any manner likely to be harmful to them or
their business, business reputation or personal reputation; provided
that both you and the Company shall respond accurately and fully to any
question, inquiry or request for information when required by legal
process.
12. RELEASE. In exchange for the payments and other consideration under this
Agreement, you agree to execute the Employee Agreement and Release
attached hereto as Exhibit A. In addition, both the Company and you
hereby release the other party, and the other party's officers,
directors, employees, shareholders and agents, from all past, present
and future disputes, claims, damages, controversies, demands, rights,
obligations, liabilities, actions and causes of action of every kind and
nature, in equity or otherwise, whether known, unknown, suspected,
unsuspected, disclosed or undisclosed, and that have arisen or arise
directly or indirectly out of, or relate directly or indirectly to, any
circumstance, agreement, activity, action, omission, event or matter
occurring or existing on or prior to the date of this Agreement and
which arise out of or relate to the Employment Agreement or any other
prior association between you and the Company (excluding such party's
continuing rights as expressly set forth herein and such party's rights
under the Noncompetition Agreement dated September 29, 1997 between you
and the Company (the "Noncompetition Agreement"), the Proprietary
Information and Inventions Agreement and any Option Agreement).
13. MISCELLANEOUS. This Agreement, including Exhibit A and Exhibit B,
constitutes the complete, final and exclusive embodiment of the entire
agreement between you and the Company with regard to this subject
matter. It is entered into without reliance on any promise or
representation, written or oral, other than those expressly contained
herein, and it supersedes any other such promises, warranties or
representations. Notwithstanding the foregoing or anything else
contained herein, the Noncompetition Agreement, the Proprietary
Information and Inventions Agreement and each Option Agreement shall
continue in full force and effect in accordance with their respective
terms. This Agreement may not be modified or amended except in a writing
signed by both you and a duly authorized officer of the Company. This
Agreement shall bind the
3
<PAGE> 4
heirs, personal representatives, successors and assigns of both you and
the Company, and inure to the benefit of both you and the Company, their
heirs, successors and assigns. If any provision of this Agreement is
determined to be invalid or unenforceable, in whole or in part, this
determination will not affect any other provision of this Agreement and
the provision in question shall be modified by the court so as to be
rendered enforceable. This Agreement shall be deemed to have been
entered into and shall be construed and enforced in accordance with the
laws of the State of California as applied to contracts made and to be
performed entirely within California.
If the forgoing accurately sets forth our agreement, please sign below and on
the attached Employee Agreement and Release, which is part of this Agreement,
and return the originals of both to me.
I wish you luck in your future endeavors.
Sincerely,
DATAWORKS CORPORATION
By: /s/ Norman R. Farquhar
----------------------------
Norman R. Farquhar
Executive Vice President
and Chief Financial Officer
Exhibit A - Employee Agreement and Release
Exhibit B - Proprietary Information and Inventions Agreement
Agreed to and accepted this __ day of April, 1998:
/s/ Robert C. Vernon
- ---------------------
Robert C. Vernon
4
<PAGE> 5
EXHIBIT A
EMPLOYMENT AGREEMENT AND RELEASE
Except as otherwise set forth in this Agreement, I hereby release,
acquit and forever discharge the Company, its parents and subsidiaries, and
their officers, directors, agents, servants, employees, attorneys, shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys fees, damages, indemnities
and obligations of every kind and nature, in law, equity, or otherwise, known
and unknown, suspected and unsuspected, disclosed and undisclosed, arising out
of or in any way related to agreements, events, acts or conduct at any time
prior to and including the execution date of this Agreement, including but not
limited to: all such claims and demands directly or indirectly arising out of or
in any way connected with my employment with the Company or the termination of
that employment; claims or demands related to salary, bonuses, commissions,
stock, stock options, or any other ownership interests in the Company, vacation
pay, fringe benefits, expense reimbursements, severance pay, or any other form
of compensation; claims pursuant to any federal, state or local law, statute, or
cause of action including, but not limited to, the federal Civil Rights Act of
1964, as amended; the federal Americans with Disabilities Act of 1990; the
federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the
California Fair Employment and Housing Act, as amended; tort law; contract law;
wrongful discharge; discrimination; harassment; fraud; defamation; emotional
distress; and breach of the implied covenant of good faith and fair dealing.
I acknowledge that I am knowingly and voluntarily waiving and releasing
any rights I may have under the ADEA, as amended. I also acknowledge that the
consideration given for the waiver and release in the preceding paragraph hereof
is in addition to anything of value to which I was already entitled. I further
acknowledge that I have been advised by this writing, as required by the ADEA,
that: (a) my waiver and release do not apply to any rights or claims that may
arise after the execution date of this Agreement; (b) I have been advised hereby
that I have the right to consult with an attorney prior to executing this
Agreement; (c) I have twenty-one (21) days to consider this Agreement (although
I may choose to voluntarily execute this Agreement earlier); (d) I have seven
(7) days following the execution of this Agreement by the parties to revoke the
Agreement; and (e) this Agreement shall not be effective until the date upon
which the revocation period has expired, which shall be the eighth day after
this Agreement is executed by me, provided that the Company has also executed
this Agreement by that date ("Effective Date").
5
<PAGE> 6
In giving this release, which includes claims which may be unknown to me
at present. I acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND
TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive and
relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to my release of any claims I may
have against the Company.
By:
-------------------------------------
Robert C. Vernon
Date:
------------------------------------
6
<PAGE> 7
EXHIBIT B
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
DATAWORKS CORPORATION
CONFIDENTIALITY, NON-DISCLOSURE,
ASSIGNMENT OF INTELLECTUAL PROPERTY AND
ASSOCIATION AGREEMENT
I. PREAMBLE:
A. The parties to this agreement are:
1. DataWorks Corporation, Inc., its subsidiaries and affiliates
(hereinafter "DataWorks");
2. Robert C. Vernon, a potential/current employee of, or current
independent contractor with DataWorks (hereinafter "ASSOCIATE").
B. Consideration:
ASSOCIATE is an employee, a prospective employee or independent
contractor working for DataWorks. This agreement is intended to
formalize in writing certain understandings and procedures which have
been in effect since the time the ASSOCIATE was initially employed or
engaged by DataWorks. In consideration of the ASSOCIATE's original
and continuing employment with, or work for DataWorks in a capacity
in which he or she may receive, or contribute to the production of,
Confidential Information or Intellectual Property (as defined below),
ASSOCIATE hereby confirms his or her understanding and agreement as
follow:
II. DEFINITIONS:
C. For purposes of this agreement, "Confidential Information" shall
mean information or material proprietary to DataWorks or
designated as Confidential Information by DataWorks and not
generally known by non-DataWorks personnel, which the ASSOCIATE
develops, or of which ASSOCIATE obtains knowledge, or to which
the ASSOCIATE may obtain access, through or as a result of, the
ASSOCIATE's relationship with DataWorks (including information
conceived, originated, discovered or developed in whole or in
part by the ASSOCIATE). Confidential Information includes, but
is not limited to the following types of information and other
information of a similar nature (whether or not reduced to
writing): discoveries, ideas, concepts, software in various
stages of development, designs, drawings, specifications,
techniques, models, data, source code, object code, data
structures, instruction sets, documentation, diagrams, flow
charts, research, development, training methods, training
manuals, processes, procedures, "know-how", marketing techniques
and materials,
<PAGE> 8
marketing and development plans, customer names
and other information related to customers, price lists, pricing
policies and financial information. Confidential information
also includes any information described above which DataWorks
obtains from other entities and which DataWorks treats as
proprietary or designates as Confidential Information, whether
or not owned or developed by DataWorks. INFORMATION PUBLICLY
KNOWN THAT IS GENERALLY EMPLOYED BY THE TRADE AT OR AFTER THE
TIME ASSOCIATE FIRST LEARNS OF SUCH INFORMATION, OR GENERIC
INFORMATION OR KNOWLEDGE WHICH ASSOCIATE WOULD HAVE LEARNED IN
THE COURSE OF SIMILAR EMPLOYMENT OR WORK ELSEWHERE IN THE TRADE,
SHALL NOT BE DEEMED PART OF THE CONFIDENTIAL INFORMATION.
D. For purposes of this agreement, "DataWorks' Business" shall mean
the design, manufacture, fabrication, development, testing,
marketing, advertising, servicing, authorship, sales, and
licensing of: computers, computer hardware, computer software,
services, services related to the support of data processing
services, computer firmware and computer manuals as well as the
training and education of computer users.
E. For purposes of this agreement "Intellectual Property," shall
mean those forms of authorship (as understood from Title 17 of
the United States Code), invention (as understood by Title 35 of
the United States Code) and identification (as understood from
Title 15 of the United States Code Section 1051 et seq,
trademarks and servicemarks) and such other forms of property
rights in ideas, "know how", inventions, discoveries, or in
their physical embodiments as shall be authorized by state,
local, territorial, federal or international law.
III. ASSOCIATE AGREES:
F. ASSOCIATE agrees during his or her employment by DataWorks and
for two years thereafter to hold in confidence and not to
directly or indirectly reveal, report, publish, copy, disclose
or transfer any Confidential Information to any person or entity
or utilize any Confidential Information for any purpose except
in the course of ASSOCIATE's work for DataWorks.
G. ASSOCIATE agrees to promptly disclose to DataWorks, all
Intellectual Property conceived during the term of his or her
employment.
H. ASSOCIATE agrees that all Intellectual Property meeting the
conditions of California Labor Code, Section 2870, is the
exclusive property of DataWorks.
I. ASSOCIATE agrees to assign to DataWorks all right, title and
interest in any Intellectual Property belonging to DataWorks
under Section 2870 of the California Labor Code.
J. ASSOCIATE agrees to promptly execute all papers and otherwise
cooperate as is necessary to obtain and enforce U.S. and foreign
patents, copyrights, trademark,
<PAGE> 9
servicemark and trade secret protection on Intellectual Property
belonging to DataWorks.
K. ASSOCIATE agrees that all works of authorship prepared by
ASSOCIATE in the course of his or her employment, including
computer programs and other software, as well as manuals
describing the operation of said programs and software, or
manuals prepared for training, constitute works for hire under
17 U.S.C. Section 101 and 201(b).
L. ASSOCIATE agrees that all notes, data, reference materials.
schedules, drawings, memoranda, documentation and records in any
way incorporating or reflecting any Confidential Information
shall belong exclusively to DataWorks and ASSOCIATE agrees to
turn over all copies of such materials, in the ASSOCIATE's
control to DataWorks upon request or upon termination of the
ASSOCIATE's relationship with DataWorks.
M. ASSOCIATE agrees that tangible embodiments of Confidential
Information are not to be removed from DataWorks' premises
without DataWorks' prior written consent.
N. ASSOCIATE agrees to cooperate with DataWorks in the protection
of DataWorks' Confidential Information for five (5) years after
ASSOCIATE's termination, provided DataWorks covers ASSOCIATE's
expenses and tenders a per diem allowance equivalent to
ASSOCIATE's then current salary.
O. ASSOCIATE agrees to participate in a termination interview
immediately (within two (2) working days) upon leaving
DataWorks. Said interview will include requiring:
1. ASSOCIATE to certify that all Confidential Information
of DataWorks has been returned; and
2. ASSOCIATE shall certify what non-DataWorks Confidential
Information or Intellectual Property ASSOCIATE has
created while employed at DataWorks.
P. ASSOCIATE acknowledges that future promotions or participation
in ownership may be contingent on execution of a more stringent
secrecy and non-use agreement.
IV. DATAWORKS AGREES:
Q. To pay any costs of obtaining and maintaining U.S. and foreign
protection an any Intellectual Property belonging to DataWorks.
R. DataWorks agrees to pay the salary, benefits and/or fees for
ASSOCIATE as previously agreed.
<PAGE> 10
S. Nothing contained in this agreement obligates DataWorks to apply
for any patent, copyright, trademark or servicemark protection.
V. LEGAL IMPLICATIONS:
T. Because of the unique nature of the Confidential Information,
ASSOCIATE understands and agrees that DataWorks will suffer
irreparable harm in the event that ASSOCIATE fails to comply
with any of his or her obligations under this agreement and that
monetary damages will be inadequate to compensate DataWorks for
such breach. Accordingly, ASSOCIATE agrees that DataWorks will,
in addition to any other remedies available to it, at law or in
equity, be entitled to injunctive relief to enforce the terms of
this agreement.
U. This agreement shall be governed by the California law
applicable to contracts between residents of California which
are wholly executed and performed in California.
V. In the event of legal action brought by either party, the
prevailing party shall be entitled to reimbursement of full
legal fees and costs as set by the court.
W. ASSOCIATE agrees to jurisdiction and venue exclusively in the
Courts of San Diego County, California.
X. ASSOCIATE acknowledges that DataWorks has made no
representations as to any right of ASSOCIATE to continued
employment and ASSOCIATE hereby acknowledges that his or her
employment is "AT WLL".
1. ASSOCIATE acknowledges that no modification of this "AT
WILL" employment is effective unless made to ASSOCIATE
in writing by the President of DataWorks.
Y. This agreement contains the full and complete understanding of
the parties with respect to the subject matter hereof and
supersedes all prior representations and understandings whether
oral or in writing.
Z. This agreement can only be modified in writing. Any modification
of this agreement must be executed by the President of DataWorks
to be enforceable against DataWorks.
VI. EXCEPTIONS FROM AGREEMENT:
AA. The parties agree that any invention embodied in an issued
patent or disclosed in a patent application filed prior to the
commencement of ASSOCIATE's relationship with DataWorks shall
not be subject to the terms of this agreement.
BB. The parties agree that any Intellectual Property set forth in
Exhibit "A" attached to this agreement shall not be subject to
the terms of this agreement.
<PAGE> 11
CC. The parties agree that any Intellectual Property not belonging
to DataWorks under California Labor Code Section 2870 -
Section 2872 (reprint attached hereto as Exhibit W) shall not be
subject to the terms of this agreement.
1. Exhibit "A" attached:[ ]
2. No exclusions requiring an Exhibit "A" exist:[ ]
VII. EXECUTION:
I agree to the above terms and acknowledge receipt of a copy of this
agreement
DATED: 12/15/97
/s/ Robert C. Vernon
-------------------------------------------------
ASSOCIATE (Signature)
Robert C. Vernon
-------------------------------------------------
Name (Printed)
-------------------------------------------------
Social Security Number
35 Grand Miramar, Henderson NV 89011
-------------------------------------------------
Mailing Address
DATED: _________________
-------------------------------------------------
DataWorks Corporation
President
<PAGE> 12
EXHIBIT B
ARTICLE 3.5
INVENTIONS MADE BY AN EMPLOYEE
Section 2870. Employment Agreements; Assignment or Rights
Any provision in an employment agreement which provides that an employee
shall assign or offer to assign any of his or her rights in an invention to his
or her employer shall not apply to an invention for which no equipment,
supplies, facility, or trade secret information of the employer was used and
which was developed entirely on the employee's own time, and (a) which does not
relate (1) to the business of the employer or (2) to the employer's actual or
demonstrably anticipated research or development, or (b) which does not result
from any work performed by the employee for the employer. Any provision which
purports to apply to such an invention is to that extent against the public
policy of this state and is to that extent void and unenforceable.
Section 2871. CONDITION OF EMPLOYMENT OR CONTINUED EMPLOYMENT;
DISCLOSURE OF INVENTION
No employer shall require a provision make void and unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
Section 2872. Notice to Employee; Burden of Proof
If an employment agreement entered into after January 1, 1980, contains a
provision requiring the employee to assign or offer to assign any of his or her
rights in any invention to his or her employer, the employer must also, at the
time the agreement is made, provide a written notification to the employee that
the agreement does not apply to an invention which qualifies fully under the
provisions of Section 2870. In any suit or action arising thereunder, the burden
of proof shall be on the employee claiming the benefits of its provisions.
<PAGE> 1
Exhibit 11
DATAWORKS CORPORATION
STATEMENTS OF CONSOLIDATED COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net Income $ 830 $ 1,441 $ 3,922 $ 3,330
======= ======= ======= =======
Weighted average number of common shares outstanding 14,306 13,787 14,209 13,713
======= ======= ======= =======
Basic earnings per share $ 0.06 $ 0.10 $ 0.28 $ 0.24
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
Net Income $ 830 $ 1,441 $ 3,922 $ 3,330
======= ======= ======= =======
Weighted average number of common shares outstanding 14,306 13,787 14,209 13,713
Weighted average options and warrants to purchase common
Stock as determined by the treasury method 707 650 806 655
Weighted average number of common shares outstanding as
Adjusted 15,013 14,437 15,015 14,368
======= ======= ======= =======
Diluted earning per share $ 0.06 $ 0.10 $ 0.26 $ 0.23
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 29,261
<SECURITIES> 11,613
<RECEIVABLES> 55,766
<ALLOWANCES> 2,602
<INVENTORY> 0
<CURRENT-ASSETS> 106,222
<PP&E> 22,665
<DEPRECIATION> 12,171
<TOTAL-ASSETS> 136,696
<CURRENT-LIABILITIES> 40,413
<BONDS> 1,088
0
0
<COMMON> 87,653
<OTHER-SE> 6,512
<TOTAL-LIABILITY-AND-EQUITY> 136,696
<SALES> 43,104
<TOTAL-REVENUES> 81,610
<CGS> 8,222
<TOTAL-COSTS> 37,226
<OTHER-EXPENSES> 38,851
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> 6,177
<INCOME-TAX> 2,255
<INCOME-CONTINUING> 3,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,922
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.26
</TABLE>
